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Jeremy Pflug - Spreadsheet Assignment #2

Jeremy Pflug - Spreadsheet Assignment #2 - Spreadsheet...

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Spreadsheet Assignment 2 During mid-October 2001, the top managers of the Kramerica Corporation, a leading manufacturer of windsurfing equipment and surfboards, were gathered in the president’s conference room reviewing the results of the company’s operations during the past fiscal year (which runs from October 1 to September 30). “Not a bad year, on the whole,” remarked the president, Chuck Jamison. “Sales were up, profits were up, and our return on equity was a respectable 15%. In fact,” he continued, “the only dark spot I can find in our whole annual report is the profit-on-sales ratio, which is only 2.25%. Seems like we ought to be making more than that, don’t you think, Tim?” He looked across the table at the vice president for finance, Tim Baggit. “I agree,” replied Tim, “and I’m glad you brought it up, because I have a suggestion on how to improve that situation.” He leaned forward in his chair as he realized he had captured the interest of the others. “The problem is, we have too many expenses on our income statement that are eating up the profits. Now, I’ve done some checking, and the expenses all seem to be legitimate except for interest expense. Look here, we paid over $250,000 last year to the bank just to finance our short-term borrowing. If we could have kept that money instead, our profit-on-sales ratio would have been 4.01%, which is higher than any other firm in the industry.” “But, Tim, we have to borrow like that,” responded Roy Thomas, the vice president for production. “After all, our sales are seasonal, with almost all occurring between March and September. Since we don’t have much money coming in from October to February, we have to borrow to keep the production line going.” “Right,” Tim replied, “and it’s the production line that’s the problem. We produce the same number of products every month, no matter what we expect sales to be. This causes inventory to build up when sales are slow and to deplete when sales pick up. That fluctuating inventory causes all sorts of problems, not the least of which is the excessive amount of borrowing we have to do to finance the inventory accumulation.” (See Tables 1 through 5 for details of Kramerica’s current operations based on equal monthly production.) “Now, here’s my idea,” said Tim. “Instead of producing 400 items a month, every month, we match the production schedule with the sales forecast. For example, if we expect to sell 150 windsurfers in October, then we only make 150. That way we avoid borrowing to make the 250 more than we don’t expect to sell, anyway. Over the course of an entire year the savings in interest expense could really add up.” “Hold on, now,” Roy responded, feeling that his territory was being threatened. “That kind of scheduling really fouls up things in the shop where it counts. It causes a feast or famine environment – nothing to do for one month, then a deluge the next. It’s terrible for the employees, not to mention the supervisors who are trying to run an efficient operation.
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